Edmonton Commercial Real Estate Posts Strong Q1: 2023 Report

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Investment in commercial real estate in Edmonton posted one of its strongest first quarters in recent history, with overall sales volume rising close to $800 million and sales nearing 200, according to data available from The Network. Industrial and land were the top performing asset classes in terms of dollar volume, up 76 per cent and 45 per cent respectively in the first three months of the year, compared to the same period in 2022, followed by multi-family, retail and office.

Momentum continues to ramp up in the industrial sector as logistics, warehousing and distribution tenancies spillover from the Lower Mainland and Toronto. Large organizations such as Amazon and Home Depot have been drawn to the region’s affordable price point for land, its young, educated labour force, and favourable provincial tax structure and incentive programs. Last September, the city was named the centre of Western Canada’s new hydrogen economy, with construction well underway on Air Products’ new $1.6 billion hydrogen facility. New business has also been pulled to the region, with Delta, BC’s English Bay Blending and Fine Chocolates recently announcing their decision to relocate and expand in Stony Plain, Alberta. The company will invest approximately $30 million in the construction of a 120,000-square-foot food and manufacturing facility later this year, creating 70 permanent positions.

Owner-users and single tenants continue to seek industrial product, but inventory remains tight, especially for multi-bay properties, despite on-going construction in Edmonton’s peripheral areas. As such, there has been upward pressure on average lease rates, which have climbed 3.5 per cent year-over-year, especially in sought-after areas such as Parkland County and Acheson. Demand has also accelerated in the Greater Edmonton Area, where activity is now as strong or stronger than Edmonton Proper. Availability rates for industrial continue to fall in Edmonton, now sitting at 6.2 per cent, down from 7.5 per cent in the first quarter of 2022, according to the Altus Group.

Development land has seen significant growth over the past year, with 54 sales in Edmonton in the first quarter of the year up 26 per cent to over year-ago levels for the same period and dollar volumes rising to $132 million. Industrial product is becoming increasingly difficult to find in Edmonton Proper and construction is more expensive due to inflation and higher interest rates. The surrounding counties have experienced an uptick in activity in recent years as a result, given the greater supply of land at a lower price point and tax base. Twenty-one tracts of land zoned industrial traded in the first three months of the year in Edmonton, followed by up urban/agricultural.

Multi-family land sales fell just short of last year’s levels, with eight sales valued at over $21 million moving in the first three months of the year. Existing sales of apartments in Edmonton were down marginally from Q1 2022, with 19 high-rise, walk-up, and townhomes changing hands, as fewer private portfolios make it to market. Financing land can be a challenge for some in today’s higher interest rate environment, which has prompted an uptick in vendor-take-back mortgages at a lower rate than currently available at conventional lenders. Approvals in place have also helped to accelerate land sales on readily available land with servicing and zoning in place.

Activity in the office sector softened in the first quarter of the year despite greater inducements, with availability rates edging slightly higher to 20.4 per cent, according to data available from Altus Group. Vacancy rates remain high, even with the traffic the Ice District, a mixed-use sports and entertainment district surrounding Rogers Place and Ford Hall, that includes office, condominium, hotels, restaurants and retail brings to the core. Construction is underway on a 500,000-square-foot office tower in the city core, slated for completion in 2025, with Canadian Western Bank as its lead tenant. There has been a flight to quality, prompting landlords in B and C class buildings to enhance their lobbies, hallways, and retail space. Companies expecting employees to return to the office in some sort of hybrid model are also upping their game, including new kitchens with coffee bars, tenant mixers, accessible parking and increased safety measures. Few conversions from commercial to office have occurred to date, given that many buildings in the core are not well-suited for repurposing. Demand for suburban office space, on the other hand, has held relatively steady.

Retail continues to be exceptionally strong, particularly in the city suburbs, given population growth and higher disposable incomes within the province. Twenty-six sales were reported in the first quarter of 2023 in Edmonton, an increase of 28 per cent over year-ago levels. Sales volumes more than doubled year-over-year, approaching $107 million, up from almost $50 million in Q1 2022. Strip plazas and shopping centres continue to be a favourite with investors, with good product moving quickly. No vacuum has been reported in the wake of the Nordstrom’s exit, with at least half a dozen tenants expressing interest in the space. Loblaw recently announced its intention to invest $2 billion to open 38 new and/or renovated stores. Demand for smaller retail footprints is increasing as retailers become more efficient. Space optimization is happening across the city, from retail storefront on main arteries to large power and retail centres. Average price per square foot now ranges between $28 to $38 per square foot.

Edmonton’s commercial market is expected to build on its strong first quarter throughout the remainder of the year as inflation slowly subsides and the cost of construction stabilizes. Industrial will remain the city’s commercial frontrunner, characterized by strong demand and low supply, but the remaining asset classes should perform well except for office space in the core. Greater clarity regarding work from home policies should help employees return to offices in the core, likely in some sort of hybrid work model. Incentives provided by the province through Alberta’s Investment and Growth Fund (IGF) are expected to continue to attract investment and business to Alberta from other parts of the country who are seeking competitive land pricing, lower development costs, and a younger, educated, workforce. Companies committed to a minimum capital investment of $10 million have the added benefit of a 12 per cent provincial tax credit in the province. Population growth will continue to contribute to the overall economy in the years ahead, with over 36,000 new residents added between July 2021 and July 2022, bringing the total population in Edmonton to more than 1.5 million, according to estimates from Statistics Canada.

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